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At the foot of Telegraph Hill in San Francisco, in a renovated grain mill with soaring ceilings and wooden beams, Bart Sights is refining his recipes for denim. In his hands, stained dark blue from day after day of plunging fabric into buckets of indigo dye, he holds a list of steps for creating a particularly vexing style: women’s skinny jeans. Most such jeans contain so much synthetic fiber they appear slick, cheap, and unlike real denim. Sights has been searching for a way to give the fabric just the right amount of stretch, in just the right places—enough to flatter the figure, but not so much that they stop looking like jeans.

Sights is Levi Strauss’s senior director for technical innovation, and the Telegraph Hill space is the company’s research and development lab. There, Levi’s is overhauling its namesake brand’s entire women’s line. The company, founded in 1853, has survived the Civil War, the Great Depression, and other epochal threats, but in the last two years it’s been tormented by an enemy none of its executives saw coming: yoga pants. “I don’t even say the words,” Sights says. Comfortable and flattering at the same time, athletic pants last year sold in about equal numbers to jeans for the first time in the U.S., according to market researcher NPD Group, as revenue from women’s jeans fell 8 percent. At Levi’s, the yoga pants scourge is especially vexing, disrupting a turnaround plan by a new chief executive officer that had been showing signs of success.

Sights, 50, has a closely shaved head and the soft remnants of a Kentucky accent. In his lab, he points to a pair of men’s jeans purchased from a secondhand market in Thailand, possibly worn by a construction worker or roofer, that he wants to recreate for the women’s line. Years of sweat, dirt, and stress have created a pattern as unique as a fingerprint; deep whiskers mark the upper thigh, and strips of blue have faded like paint on an old barn. Artificially reproducing the wear is easy, done with sandpaper, oxygen baths, and rocks. “The trick,” Sights says, “is to get a look like this on a very modern fabric—a fabric with a lot of stretch in it.”

Workers load jeans onto inflatable legs to experiment with creating different distressed looks. The best techniques, known as “recipes,” are then replicated on a larger scale.

His new technique, inspired by the makeup industry, is called contouring. Sights uses lasers to etch away the top layer of indigo, highlighting the center of the leg so the inner and outer thighs appear to recede into the background, helping the leg look slimmer. The whisker patterns on the thighs are applied in a way that draws the eye away from the edge of the hips, while chevrons run along the legs to give an elongated impression.

The finishing comes on top of new materials that Sights and his team have helped develop. It’s not as simple as putting more stretch into the denim. They don’t want to make yoga jeans. They want to make jeans that are more comfortable, yet retain their 19th century essence. For Levi’s, a company whose riveted trousers can be found at the Smithsonian, the entire notion of innovation is ticklish. “There’s not another piece of apparel in the world—probably in the history of mankind—that has remained virtually unchanged and still provides function,” Sights says. “Pride in what you’re wearing. Beauty.” But if the tenets of denim are immutable, the way Levi Strauss sells jeans has been long overdue for a change.

Two decades ago, Levi’s was bigger than Nike, with revenue exceeding $7 billion. Sales have since sagged to $4.8 billion. The company is privately owned by its founder’s heirs, and the luxury of not having to answer to public shareholders has helped make Levi’s slow to respond to change. For a long time, that didn’t matter—Levi’s had built a machine that churned out familiar jeans for large department stores and customers with predictable tastes. Fifteen years ago, about half of the company’s revenue came from its 10 largest U.S. customers. As those businesses declined—with many department stores folding or consolidating—so did their sales of Levi’s jeans. Levi’s now gets a quarter of its revenue from 550 company-owned stores around the world and from the Web, up from just 4 percent in 2006. “They weren’t a dynamic business for the longest time,” says Greg Ellis, who follows the industry for consulting firm Kurt Salmon. (Levi’s debt is publicly traded, and several analysts track the company.) “When they started expanding their stores, that’s when they started to think about being fashionable and participating in the top end of the market and keeping up with the style changes.”

A new CEO, Chip Bergh, arrived in late 2011 from Procter & Gamble, where he ran the $7 billion male-grooming division and helped introduce the Gillette Fusion razor. Bergh’s mandate at Levi’s, as he puts it, was “to take on the challenge of reinventing an iconic American institution and make the company great again.” He embraced jeans culture, telling a conference audience that he hadn’t washed the denim he was wearing in a year. (The style tip, meant to help jeans age gracefully, went viral. “That’ll go on my tombstone, I suspect,” he says.) Bergh, 57, replaced 9 of 11 senior executives, including hiring Karyn Hillman as chief product officer from Calvin Klein, and announced plans to cut as much as $200 million in annual costs by the end of 2016. He encouraged basic processes such as market research, sending executives to interview customers around the world. And he decided to make women’s jeans a priority. While many clothing makers get the bulk of their business from women, Levi’s gets just 23 percent, according to an SEC filing. The company says it has a quarter of the global men’s jeans market, and only 5 percent of women’s. To the business jargon-spewing Bergh, the category was “a big, big upside opportunity,” the obvious place to focus. Women were still buying denim, as any visit to a Rag & Bone boutique would attest. They just weren’t buying Levi’s.

Left: Designers borrowed the cosmetics concept of “contouring” to make legs look skinnier. Right: Sights’s desk at the San Francisco lab—and his indigo-stained fingernails.

Bergh had inherited a complicated women’s product line, introduced in 2010, with a feature called Curve ID. Every size came in three different kinds of curve—slight, demi, and bold—as well as different colors, rises, and leg openings. Wholesale buyers, unhappy about having to carry so much inventory and explain the myriad choices to customers, began dropping Curve ID jeans.

The bigger problem with the line was that Levi’s misread stretchy pants as a trend when they were more like a clothing revolution. Yoga pants’ rise is nearly synonymous with that of Lululemon, a Vancouver company that got its start in 1998 and whose market capitalization is now $9 billion. Women have long since worn yoga pants out of the vinyasa studio, finding them perfectly suited for a run to the grocery store, hanging out at the park, and attending a lecture. Yoga pants aren’t merely soft, or tight in the right places. They feature advanced materials that boost women’s figures; they last a long time; and they manage to be both stylish and casual.

Levi’s missed the appeal. “As we saw ‘casualization’ continue even further, the customer basically told us that they had enough denim until something really unique and innovative came along,” says Marshal Cohen, an analyst at NPD. “We really saw the denim industry and denim retailers basically turn their nose up on the customer and say, ‘We don’t care what you really want, we’re going to tell you what you want.’ ”

In late 2013, when Bergh was two years into his turnaround effort, Levi’s sales started to feel the impact of “athleisure.” “We’re scrambling,” Bergh told analysts in February 2014 with a bluntness rarely heard from a CEO. “I mean, there is a big difference between the product that we’ve got on the floor today and what the consumer is looking for. And we just flat-out missed it.” The company’s sales of women’s jeans fell by at least 10 percent at major U.S. retailers in the second quarter of the year, he said at the time.

By the summer of 2014, with sales of athletic pants rising 62 percent from 2010—and athleisure apparel looking less like a fad and more like a permanent addition to women’s closets—retail journalists began writing obituaries for women’s denim. Eva Mendes, the actress and style icon, spoke for many women this spring when she told a fashion blog that if she was seen wearing jeans, it could only mean that her softer pants were dirty.

Shoppers such as Kate Slattery, 25, a data scientist in San Francisco, one of dozens of women interviewed for this story, says she hasn’t bought a new pair of jeans in more than a year but did splurge on a pair of Lululemons. She loves their clever pockets. Asked for her take on Levi’s, Slattery draws a blank. “My view of Levi’s is probably 15 years old,” she says, “because I just haven’t even considered shopping there since my mom shopped with me.”

In 2012, Bergh made a trip to Corlu, Turkey, a textile town about 70 miles west of Istanbul, where Levi Strauss opened a research and development lab in 2009 at an old factory. There he met Sights, who ended up in the denim business out of college in the late 1980s when the industry was looking for commercial laundries to stonewash jeans. His family happened to own such machines in Henderson, Ky. “We had no idea,” he remembers of those first inquires about washing denim. “What, are they dirty?” Sights developed an expertise that would take him around the world as his family’s company expanded to distress denim for Levi’s, Lee, Tommy Hilfiger, and other major brands. By 2009, tastes had changed and clothing makers had shifted production to low-cost countries. The family’s company stopped production. Sights began consulting with denim mills in India, and in March 2010, Levi’s hired him to run the facility in Corlu.

That Levi’s would base its R&D almost 7,000 miles from headquarters says a lot about how the 162-year-old company valued innovation, or didn’t. The lab technically reported to a regional office in Brussels. Designers from San Francisco visited only every six months, for two-week stays. The travel around the world was long and filled with pressure to make each trip worthwhile, which had a predictably stifling effect on creativity and collaboration. Three-quarters of the work wouldn’t end up in the product line, Sights says. In the interim, designers would ship samples between the continents. “We probably spent enough on airfare to buy a 747 just to be managing product back and forth over the ocean,” Bergh says. He finally relocated the lab to San Francisco in April 2013.

On the floor of the lab during a recent visit, 14 pieces of the new women’s line are spread out in a dull spectrum of light and dark blues, blacks, and grays. The new fabrics needed to do many things. The designers wanted comfortable, forgiving materials that could reduce the number of patterns used previously to accommodate different body types. Adding stretch into denim, though, can make it lumpy or baggy in tight spots, such as the waist and knees. So the material also needed long-lasting recovery.

Sights’s team began tearing apart wet suits and other unconventional garments. “Neoprene is supercomfortable in the water because it allows movement, but it’s also superforgiving, it recovers well,” he says. “And there are some fibers in lingerie that bring these really valuable comfort attributes.”

The line reduces the number of master patterns required from 65 to about 30—closer to the men’s business—and is part of Bergh’s mission to cut costs while helping the company respond to trends faster. If, say, skinny jeans with less stretch material become popular, Levi’s can adapt.

The core of the line is called Lot 700, a nod to the original women’s jean, Lady Levi’s Lot 701, introduced in 1934. The new one features the retro “Two Horse” leather logo patch on the rear waistband and adds larger back pockets to accentuate the seat. Another style, Lot 300, uses a more girdle-like design for a different shaping effect. The 501ct can be worn in a looser fit.

To blunt its sales decline, Levi’s rushed some of the new materials that Sights was working on to market in the summer of last year, infusing skinny and midrise jeans with additional soft and stretchy material. “I can vouch for the stretchy women’s jeans, because I bought a pair this year and have been selling it to my friends,” Carla Casella, an analyst at JPMorgan Chase, said on a conference call with executives earlier this year. Harmit Singh, the chief financial officer, replied, “Only one color? You should buy more.”

“I work,” Casella said. “I don’t get to wear my jeans every day at JPMorgan.”

Levi’s finally introduced the new women’s line earlier this month, at an event in Manhattan’s clubby Meatpacking District. Large photographs displayed up-and-coming female artists wearing Levi’s, and six models stood like mannequins wearing the Lot 700 line. Holding court near the door, James Curleigh, Levi’s president, said he expected the women’s reboot to help the company increase wholesale prices over the next three years. Macy’s is doubling the amount of space for the brand in its flagship store in Manhattan and adding floor space at stores across the U.S., according to Louis Mastrogiacomo, who manages the women’s ready-to-wear category for Macy’s.

Curious about how consumers would respond to the new Levi’s, I sent an e-mail to Slattery, the woman who hasn’t considered the brand since she was a child, asking if she’d go to a San Francisco store that was test-selling the jeans. She agreed, and a few days after the launch party, she walks to a back wall with shelves stacked with the latest offerings. Slattery asks an employee for a dark-blue 711, the new skinny fit, and a 712, the slim cut. A few minutes later, she emerges from the dressing room wearing the latter. “They fit perfectly—I’m surprised,” she says. “They fit nice, and they’re comfortable.”

Slattery returns to the dressing room to try on the other pair and comes out with a look of surprise. The skinny fit feels like a favorite pair of going-out pants, she says, and are more comfortable than the soft work pants that she wore to meet me. The fabric is supple, yet it feels like denim, she says. While not yet willing to abandon yoga pants, Slattery says she’ll definitely consider Levi’s the next time she needs a new pair of pants. “I had this idea of Levi’s just being looser jeans, so this is kind of surprising to me,” she says. “They’re good.”